Before you get involved with a franchise and commit to a future within a specific brand or business, there are essential elements of the law that you need to know. That law is determined by the Federal Trade Commission (FTC), which requires franchisors to present all potential franchisees with a specific document offering disclosures at least ten days before a contract is signed or money changes hands. That agreement is known as the Uniform Franchise Offering Circular (UFOC). It is designed to help potential franchisees decide whether an opportunity is the right investment for them and, as such, contains a total of 23 sections.
The Franchisor and its Predecessors and Affiliates – This is the first section and provides specific information about the franchisor. This includes the location, the products / services available, and the experience of personnel working for the company.
Business Experience – This is the second section and it provides you with employment histories for all of the franchise brokers, board members, executives, officers, and management. This is to demonstrate their experience and provides specific information for the previous five years.
Litigation – This is the third section and provides information about any and all litigation that any of the officers, board members, management and executives, as well as the franchisor itself, have previously been involved in. Your attorney should fully investigate any issues arising here.
Bankruptcy – This is the fourth section and is similar to litigation in that it will detail bankruptcy issues instead of litigation proceedings.
Fees – The fifth section informs you of any upfront fees and charges that are applicable to you, including any initial franchising fee that must be paid.
Ongoing Fees – The sixth section details all costs, fees, and payments that are required to be paid following those in section five. This may be royalties, advertising, maintenance, construction, and even staffing costs.
Initial Investment – The seventh section details how much you will need to plough into the business to get it off the ground. These figures are essential for applying for financing and compiling your business plan. Of course, the figures here are typical rather than actual and more of an investment may be required.
Restrictions on Sources of Products and Services – The eighth section is complex on paper but is easy to understand as it details the goods that you are obligated to purchase or lease from the franchisor or its partners. There are often details like the quantities of goods you have to purchase, so you will have an insight into the running of the business.
Franchisee’s Obligations – The ninth section details your own personal obligations relating to the business and may or may not include policies, sale figures, training, and the site itself.
Financing – The tenth section will detail an outline of financial plans and arrangements that are available to you as a franchisee.
Franchisor’s Obligations – This eleventh section will take some reading as it is easily the longest area of the UFOC. It is also extremely important because it details the franchisor’s obligations to you. It includes various information and all of it is vital to your interests. Pay particular attention to the part outlining the advertising policy.
Territory – The twelfth section of the UFOC details your legal territorial obligations and rights. It outlines whether you have exclusivity or whether you will or may have to share a location with your competition.
Trademarks – The thirteenth section outlines the trademark rights held and whom they actually belong to. It also includes legal details of how the protection works, and thus how and when you will be able to use it.
Patents, Copyrights and Proprietary Information – Further to the above section, the fourteenth section covers ownership of patents and copyrights, and the conditions under which you may use them.
Obligation to Participate in the Actual Operation of The Franchise Business – This may sound complex, but the fifteenth section basically outlines whether you have to be involved in the business personally and the extent of your involvement.
Restrictions on What The Franchisee May Sell – Section sixteen outlines the products you will sell if you invest in the franchise, and gives ideas of further products that you may be able to sell at a later date.
Renewal, Termination, Transfer and Dispute Resolution – Section seventeen is there to protect the franchisor and franchisee because it tells you how and why you may be terminated as well as determining your rights. Should a conflict occur, it would also inform you of how to proceed with a complaint or issue.
Public Figures – The eighteenth section highlights the celebrities or public personas that will be involved in any marketing campaigns, as well as the way in which he or she will receive compensation.
Earnings Claims – The nineteenth section of the UFOC is an important one because it details typical profits, sales, and information about other franchisees. This is not required so it may not be there, but if it is not then do some research to satisfy your suspicions because you need to know these figures.
List of Outlets – Section twenty of the UFOC details statistics about the system that the franchisor employs, including the number of outlets and the location details of at least 100 of them. There will also be information about closures and contract terminations over the past three years.
Financial Statements – Category twenty-one of the UFOC relates to the franchisor’s financial background and the full statements of accounts for the previous three years. It also includes the current balance sheet. All of the above has to be certified by an accountant to maintain their validity. Your own accountant should examine them for you.
Contracts And Agreements – Section twenty-two is exactly what it says it is, so be sure to consult with your attorney to ensure that they are in your best interests.
Acknowledgment of Receipt by Respective Franchisee – The final section is literally an acknowledgement that you received the Uniform Franchise Offering Circular and is of no other consequence.
Although the Federal Trade Commission requires that all of the above be sent to you in the form of a Uniform Franchising Offering Circular (UFOC), they will not have reviewed or approved the information within the document. As such, it is your responsibility to check its accuracy via your attorney and make sure that the franchise business is really in your best interests.
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Tag: UFOC
Franchising has a longer history than many people may imagine but there have been several defining moments during its history. One of the biggest events occurred on October 21, 1979 when the Federal Trade Commission (FTC) introduced the Franchise Rule. This was designed to protect franchisees because it asserted that all US operational franchisors were legally obliged to fully disclose details that all potential franchisees should know before committing to investment.
As such, it enforced FTC standards to ensure that all disclosures contained uniform information that has been prepared to meet the legal criteria. One of the main requirements of this law ensured that there has to be evidence to support any financial details given. This in turn assures all potential franchisees that there is profit to be made and make them fully aware of any pitfalls.
More specifically, the Franchise Rule requires the following information to be disclosed by all franchisors:
(a) The franchisor must declare its affiliates, directors, officers, management and individuals responsible for all areas of the business, such as training, support, and franchising information.
(b) The franchisor must declare whether it or any of its officers, management, and directors have ever been bankrupt or faced lawsuits in the past, even those from before the individual in question joined the business.
(c) The exact amount you are expected to pay in franchise fees and various other associated charges must be disclosed. This includes all immediate and ongoing payments after the franchise contract is signed and the business has opened.
(d) Any and all restrictions on the quality of goods and services that you, as a franchisee, may use. This includes any purchase restrictions that may be in place.
(e) Any help and support that will be offered by the franchisor and any affiliates including financial support.
(f) All restrictions applicable to the goods and services you will be managing and selling, as well as any restrictions that you have to work with when dealing with customers.
(g) Any advantage or guarantees provided regarding the location and locality of the franchise.
(h) The franchise conditions under which your franchise may be terminated, sold on to another franchisee, repurchased, or modified.
(i) Franchisee training programs that are available and any fees associated with them.
(j) The involvement, if any, of celebrities or known figures in the public eye within the business, whether in advertising or behind the scenes.
(k) Site selection assistance that is offered by the franchisor.
(l) The number of present franchises, franchises projected for the future, franchises terminated or not to be renewed, and the number repurchased in the past.
(m) Full financial statement disclosure.
(n) How far you are expected to participate within the franchise operation after becoming a franchisee.
(o) Full disclosure of proof for earnings and profit claims made regarding other franchisees.
(p) Full names and addresses of franchisees that you can talk to.
All of the above legal considerations of franchising must be fully disclosed during initial contact with the representative of the franchise, whether that is a broker or the franchisor him or herself. As soon as the franchise opportunity is discussed, the legal considerations must be fully disclosed. The disclosure must be at least ten days prior to payment or to any franchise or related contract being signed. This pertains to the contract signing itself and also any financial statements changing hands.
The Federal Trade Commission does not require franchisors to register, but depending on the state your franchise may be in, it may have to register on a local level. The Uniform Franchise Circular Offering (UFOC) guidelines have been adopted by most states as a result of their strict disclosure requirements. However, you should never take it for granted that the franchise is registered or offers full disclosure, thus providing you with protection of any kind. You must research the franchisor fully before committing.
About the Author:
GlobalBX provides a FREE business for sale exchange connecting business buyers, sellers and lenders. Search over 32,000 businesses for sale and franchises for sale. Sell your business for sale for free with no listing fees and zero commissions. We have 1000s of franchises as well as franchise resales. Find franchise reviews and get free franchise information. You can also contact over 300 lenders directly and get a business loan.
I started playing golf about 10 years ago and over time have come to love the game. Although technique is a large part of what drives many golfers back to the greens, golf also has a very specific set of rules that define the game and create an equal playing field. The rules spell out how to play, how to keep score and how to determine a winner.
Franchising, too, has a set of rules, and these rules are manifested in a document called the Uniform Franchise Offering Circular (UFOC). Each prospective franchisee of every franchise company in the U.S. will receive this document as a requirement of the Federal Trade Commission. Effective since 1979, the stated purpose of the FTC rule is:
“The Rule is designed to enable potential franchisees to protect themselves before investing by providing them with information essential to an assessment of the potential risks and benefits, to make meaningful comparisons with other investments, and to further investigation of the franchise opportunity.”
In other words, the UFOC should provide you with enough information to be able to make an informed decision about purchasing the franchise. The UFOC serves as a protection for the individual against making a decision based on information not supported by fact and should be read carefully by each and every woman looking at buying a franchise as it contains such “need to know” items as the costs and fees involved, any litigation history of the franchisor and much more.
The FTC Rule requires franchisors to provide the UFOC to the prospective franchisee at the earlier of the first personal meeting or 10 business days before the franchisee signs an agreement or pays any money. (The UFOC will probably contain a receipt for you to sign and date, to show they have complied with this rule.) It also provides that the franchise agreement must be given to the prospective franchisee at least five business days before the franchisee signs any agreement or pays any money. A franchisor’s UFOC must be updated on an annual basis, or sooner if certain conditions are met.
Here are some of the items a UFOC must contain:
• History and Experience. The franchisor must provide you with a history of their past activities, especially as it may relate to potentially negative information. This information must be provided not only for the company itself as well as for its predecessors and affiliates but also for the officers and directors. The information includes factors like the business experience of the company and its principles and any fairly recent litigation or bankruptcy history for either.
• Financial Factors. The company must disclose to you the relevant financial terms of the franchise opportunity. This would include the initial franchise fees, other startup costs, and an investment range estimate for your total cost to get into the business. The UFOC must also disclose any other fees, such as the royalty, marketing and renewal fees that the franchisee will have to pay throughout the life of their franchise.
• Obligations and Restrictions. The company must disclose the obligations of both you and the company under the terms of the franchise agreement. They must also spell out any mandated restrictions that you will operate under in terms of your purchasing options and behavior as a franchisee. This may include such items as site selection and development, training, trademarks, customer service, advertising, personnel, territory, reporting and dispute resolution.
• Earnings Claims. FTC rules leave it up to the franchisor whether they want to supply information about the earnings that can be achieved in their business. If a franchisor does want to provide earnings claims, they must follow stringent rules on how this information can be given to a prospective franchisee. It is essential for the franchisor to make sure that the data provided is as accurate and representative as possible and they must also clearly label any assumptions or qualifications on the data provided. As a result, earnings claims can take a variety of angles and approaches, so reviewing the background information is vital.
• Exhibits. The company must also provide other data including audited financial statements, current franchisee lists with contact information, contracts and receipts. Item XX, information regarding franchisees of the company, is particularly important to you as you will be calling a number of these franchisees to learn about the business from the franchisee point of view. Item XXII contains the Franchise Agreement, which you will want to review with your franchise attorney before signing.
Individual State Requirements
In addition to the laws that mandate disclosure, there are also some states that have passed specific laws to further protect franchisees in that state. These laws may add additional disclosures or rules about franchise agreement terms. As an example of this, there are a number of states that require that the legal venue for any dispute must be in their state rather than in the state where the franchise company is located. These types of additional requirements vary from state to state but any that are appropriate to your situation in your state should be disclosed in the UFOC you receive.
Your responsibility
The most important point to remember regarding the UFOC is that you need to read and understand the material that the franchisor is disclosing to you. The FTC has a requirement that these documents must be presented in understandable English so that the material should be clear. It won’t make any difference, however, if you don’t carefully review the material. After you have read the document, you may want to have your attorney go through the paperwork as well.
Make sure you take the time to study the information supplied to you and you’ll have a much better chance of making sure that these legal requirements actually serve their purpose of protecting or safeguarding your interests. Just as a good SCRABBLE® player knows the 16 words that use a Q but don’t need the U, and that playing a 7-letter word like “qindars” will gain her 50 bonus points, those who read and understand the rules of the UFOC are also likely to be ahead in the game.
Kim Ellis is the President of Bison.com, a leading online resource for franchise and business opportunities. She has been quoted as an industry expert in USA Today, Wall Street Journal and a variety of local and regional publications regarding trends in business and franchising. Kim combines her entrepreneurial spirit with a diverse background in marketing and operation to help others succeed in franchising.